(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q as of September 30, 2021 and our audited consolidated financial statements for the year ended March 31, 2021 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on July 14, 2021.
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "anticipate," "suggest," "estimate," "plan," "project," "continue," "ongoing," "potential," "expect," "predict," "believe," "intend," "may," "will," "should," "could," "would," "proposal," and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to the risks described in our Annual Report on Form 10-K including: the impact of the COVID-19 pandemic on the overall economy and our results of operations; our ability to become profitable; the impact of changes to reimbursement levels from third-party payors or increased pricing pressure due to rebates; our ability to manage our accounts receivable; the impact of seasonality on our sales; the progress and timing of our development programs and regulatory approvals for our products; the benefits and effectiveness of our products; the ability of our products to meet existing or future regulatory standards; the progress and timing of clinical trials and physician studies; our expectations and capabilities relating to the sales and marketing of our current products and our product candidates; our ability to gain sufficient reimbursement from third-party payors; our ability to compete with other companies that are developing or selling products that are competitive with our products; the establishment of strategic partnerships for the development or sale of products; the risk our research and development efforts do not lead to new products; the timing of commercializing our products; our ability to penetrate markets through our sales force, distribution network, and strategic business partners to gain a foothold in the market and generate attractive margins; the ability to attain specified revenue goals within a specified time frame, if at all, or to reduce costs; the outcome of discussions with the U.S. Food and Drug Administration, or FDA, and other regulatory agencies; the content and timing of submissions to, and decisions made by, the FDA and other regulatory agencies, including demonstrating to the satisfaction of the FDA the safety and efficacy of our products; our ability to manufacture sufficient amounts of our products for commercialization activities; our ability to protect our intellectual property and operate our business without infringing on the intellectual property of others; our ability to continue to expand our intellectual property portfolio; the risk we may need to indemnify our distributors or other third parties; risks attendant with conducting a significant portion of our business outside the United States; our ability to comply with complex federal and state fraud and abuse laws, including state and federal anti-kickback laws; risks associated with changes to health care laws; our ability to attract and retain qualified directors, officers and employees; our expectations relating to the concentration of our revenue from international sales; our ability to expand to and commercialize products in markets outside the wound care market; our ability to protect our information technology and infrastructure; and the impact of any future changes in accounting regulations or practices in general with respect to public companies. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, except as required by law.
We are a global healthcare leader for developing and producing stabilized hypochlorous acid, or HOCl, products for a wide range of applications, including wound care, animal health care, eye care, oral care, disinfectant use and dermatological conditions. Our products reduce infections, itch, pain, scarring and harmful inflammatory responses in a safe and effective manner. In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties. Our stabilized HOCl immediately relieves itch and pain, kills pathogens and breaks down biofilm, does not sting or irritate skin and oxygenates the cells in the area treated assisting the body in its natural healing process. We sell our products either directly or via partners in 54 countries worldwide.
Our core market differentiation is based on being the leading developer and producer of stabilized hypochlorous acid, or HOCl, solutions. Unlike many of our competitors, we have been in business for over 20 years and in that time, we have developed significant scientific knowledge of how best to develop and manufacture HOCl products backed by decades of studies and data collection. HOCl is known to be among the safest and most-effective ways to relieve itch, inflammation and burns while stimulating natural healing through increased oxygenation and eliminating persistent microorganisms and biofilms.
We sell our products into many markets both in the U.S. and internationally. In international markets, we ship products to 54 countries. Our core strategy is to work with partners both in the United States and around the world to market and distribute our products. In some cases, we market and sell our own products.
Sonoma Dermatology has developed unique, differentiated, prescription-strength and safe dermatologic products that support paths to healing among various key dermatologic conditions. Our products are primarily targeted at the treatment of acne, the management of scars and atopic dermatitis. We are strategically focused on introducing innovative new products that are supported by human clinical data with applications that address specific dermatological procedures currently in demand. In addition, we look for markets where we can provide effective product line extensions and pricing to new product families.
In the United States, we partnered with EMC Pharma, LLC in March 2021 to sell our prescription products for an initial term of five years, subject to meeting minimum purchase and other requirements. Pursuant to our agreement with EMC Pharma, we manufacture products for EMC Pharma and EMC Pharma markets, sell and distribute them to patients and customers.
On September 28, 2021, we launched a new product direct to consumers on Amazon.com, Regenacyn(R) Advanced Scar Gel, which is clinically proven to improve the overall appearance of scars while reducing pain, itch, redness, and inflammation. Additionally, on the same day, we launched Regenacyn(R) Plus, a prescription-strength scar gel which is available as an office-dispense product through physician offices.
We sell dermatology products in Europe, Asia, and Brazil through a distributor network. In these international markets, we have a network of partners, ranging from country specific distributors to large pharmaceutical companies to full-service sales and marketing companies. We work with our international partners to create products they can market in their home country. Some products we develop and manufacture are private label while others use branding we have already developed. We have created or co-developed a wide range of products for international markets using our core HOCl technology.
First Aid and Wound Care
In the United States, we sell our wound care products directly to hospitals, physicians, nurses, and other healthcare practitioners. In March 2021, we granted EMC Pharma the non-exclusive right to sell wound care products to certain governmental entities.
To respond to market demand for our HOCl technology-based products, we launched our first direct to consumer over the counter product in the United States in February 2021. Microcyn(R) OTC Wound and Skin Cleanser is formulated for home use without prescription to help manage and cleanse wounds, minor cuts, and burns, including sunburns and other skin irritations. Microcyn(R) OTC Wound and Skin Cleanser is available without prescription through Sonoma's online store. It is also available as a prescription product through physicians.
In Europe, we rely on agreements with country-specific distributors for the sale of our wound care products under a variety of brand names into 27 countries, including Austria, Belgium, Croatia, Italy, the Netherlands, Germany, Greece, Hungary, the Czech Republic, Spain, Norway, Switzerland, Poland, Portugal, Slovenia, the Slovak Republic, Finland, Denmark, Montenegro and Serbia.
In March 2021, we received approval to market and use our HOCl products as biocides under Article 95 of the European Biocidal Products Regulation in France, Germany, and Portugal. The approval applies to our products MucoClyns(TM) for human hygiene to be marketed and commercialized by us, MicrocynAH(R) for animal heath marketed and commercialized through our partner, Petagon Limited, and Microsafe for disinfectant use to be marketed and commercialized through our partner, MicroSafe Group Dubai.
Our HOCl-based wound care products are intended for the treatment of acute and chronic wounds as well as first-and second-degree burns. Their primary mode of action involves the mechanical removal of cellular debris, senescent cells, necrotic tissue, and foreign material from the skin and wound surface using a moistened dressing along with irrigation. Removal of these materials through these actions is known to decrease infection rates and improve wound healing. The secondary mode of action is a function of the antimicrobial properties of HOCl and its salt, hypochlorite. These ancillary medicinal substances which are present in very low, non-toxic amounts, assist in the removal of microorganisms. Since HOCl is an important constituent of our innate immune system and is formed and released by the macrophages during phagocytosis, it is advantageous to other wound-irrigation and antiseptic solutions as highly organized cell structures such as human tissue can tolerate the action of our wound care solution while single-celled microorganisms cannot. Due to its unique chemistry, our wound treatment solution is much more stable than similar products on the market and therefore maintains much higher levels of hypochlorous acid over its shelf life.
Oral, Nasal and Eye Care
Our product Acuicyn(TM) is an antimicrobial prescription solution for the treatment of blepharitis and the daily hygiene of eyelids and lashes and helps manage red, itchy, crusty and inflamed eyes. It is strong enough to kill the bacteria that causes discomfort, fast enough to provide near instant relief, and gentle enough to use as often as needed. In the United States, our partner EMC Pharma is selling our prescription-based eye care product through its distribution network.
On September 28, 2021, we launched Ocucyn Eyelid & Eyelash Cleanser, which is sold directly to consumers on Amazon.com. Ocucyn Eyelid & Eyelash Cleanser, designed for everyday use, is a safe, gentle, and effective solution for good eyelid & eyelash hygiene.
On May 19, 2020, we entered into a new license and distribution agreement with our existing partner, Brill International S.L. for our Microdacyn60(R) Eye Care HOCl-based product. Under the new license and distribution agreement, Brill has the right to market and distribute our eye care product under the private label Ocudox(TM) in Italy, Germany, Spain, Portugal, France, and the United Kingdom for a period of 10 years, subject to meeting annual minimum sales quantities. In return, Brill will pay us a one-time fee, and the agreed upon supply prices. Previously, under the old license and distribution agreement dated August 1, 2018, Brill marketed our eye care product only in Spain and Portugal. In parts of Asia, Dyamed Biotech markets our eye product under the private label Ocucyn.
In the United States, on December 14, 2020, we partnered with Gabriel Science, LLC to market our HOCl-based products in the dental, head and neck markets and launched Endocyn(R), a biocompatible root canal irrigant. Internationally, our product Microdacyn60(R) Oral Care treats mouth and throat infections and thrush. Microdacyn60 solution assists in reducing inflammation, pain, soothing cough relief and does not contain any harmful chemicals. It does not stain teeth, is non-irritating, non-sensitizing, has no contraindications and is ready for use with no mixing or dilution. In New Zealand and Australia, our partner Te Arai BioFarma Ltd. markets our oral product under their label Oracyn(R) Oral Care.
Our international nasal care product Sinudox(TM) based on our HOCl technology is a solution intended for nasal irrigation. Sinudox Hypotonic Nasal Hygiene clears and cleans a blocked nose, stuffy nose and sinuses by ancillary ingredients that may have a local antimicrobial effect. Sinudox is sold through Amazon in Europe. In New Zealand and Australia, our partner Te Arai markets our nasal product under their label Nasocyn(R) Nasal Care.
Animal Health Care
MicrocynAH(R) is a HOCl-based topical product that cleans, debrides and treats a wide spectrum of animal wounds and infections. It is intended for the safe and rapid treatment of a variety of animal afflictions including cuts, burns, lacerations, rashes, hot spots, rain rot, post-surgical sites, pink eye symptoms and wounds to the outer ear of any animal.
For our animal health products sold in the U.S. and Canada, we partnered with Manna Pro Products, LLC to bring relief to pets and peace of mind to their owners. Manna Pro distributes non-prescription products to national pet-store retail chains, farm animal specialty stores, in the United States and Canada, such as Chewy.com, PetSmart and Tractor Supply. Most recently, we expanded our animal health product offerings by adding a MicrocynAH line for felines at PetSmart.
For the Asian and European markets, on May 20, 2019, we partnered with Petagon, Limited, an international importer and distributor of quality pet food and products for an initial term of five years. We supply Petagon with all MicrocynAH products sold by Petagon. On August 3, 2020, Petagon received a license from the People's Republic of China for the import of veterinary drug products manufactured by us. This is the highest classification Petagon and Sonoma can receive for animal health products in China.
In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties. HOCl has been formulated as a disinfectant and sanitizer solution for our partner MicroSafe Group, Dubai, and is sold in numerous countries. It is designed to be used to spray in aerosol format, to areas and environments which are suspected to serve as a breeding ground for the spread of infectious disease, likely to result in epidemics or pandemics. The medical-grade surface disinfectant solution is used in hospitals worldwide to keep doctors and patients protected and safe. In May 2020, Nanocyn(R) Disinfectant & Sanitizer, received approval to be entered into the Australian Register of Therapeutic Goods, or ARTG, as well as in Canada, for use against the coronavirus SARS-CoV-2, or COVID-19. Nanocyn has also met the stringent environmental health and social/ethical criteria of Good Environmental Choice Australia, or GECA, becoming one of the very few eco-certified, all-natural disinfectant solutions in Australia.
Through our partner Microsafe Group DMCC, Dubai, we sell hard surface disinfectant products into Europe, the Middle East and Australia. On July 31, 2020, we partnered with MicroSafe Group to seek regulatory approval in the United States to sell hard surface disinfectants in the United States. To date, we have not received such regulatory approval.
Investors and others should note that we announce material financial information using our company website ( www.sonomapharma.com ), our investor relations website (ir.sonomapharma.com), SEC filings, press releases, public conference calls and webcasts. The information on, or accessible through, our websites is not incorporated by reference in this Quarterly Report on Form 10-Q.
Results of Continuing Operations Comparison of the Three and Six Months Ended September 30, 2021, and 2020 Revenue The following tables shows our consolidated revenue and revenue by geographic region for the three and six months ended September 30, 2021, and 2020: Three Months Ended September 30, (In thousands) 2021 2020 $ Change % Change United States $ 1,347 $ 1,984 $ (637 ) (32% ) Latin America 518 2,024 (1,506 ) (74% ) Europe and Rest of the World 1,879 1,761 118 7% Total $ 3,744 $ 5,769 $ (2,025 ) (35% ) Six Months Ended September 30, (In thousands) 2021 2020 $ Change % Change United States $ 2,939 $ 3,605 $ (666 ) (18% ) Latin America 1,083 4,350 (3,267 ) (75% ) Europe and Rest of the World 3,406 3,581 (175 ) (5% ) Total $ 7,428 $ 11,536 $ (4,108 ) (36% )
The decrease in United States revenues for the three and six months ended September 30, 2021, compared to the prior year of $637,000 and $666,000, respectively, was primarily the result of a decrease in dermatology revenue due to restructuring of our sales team in response to COVID-19 and, to a lesser extent, related to the transfer of sales of our prescription dermatology products to EMC Pharma. EMC is now managing sales and distribution for those products. As a result, we sell products to EMC for a lower cost than we realized from our own direct sales, however we have also eliminated the overhead of direct sales. Acute care product revenues were down slightly from the prior year. For the three months ended September 30, 2021, we saw a slight increase in U.S. animal care revenue versus the prior year of $133,000. For the six months ended September 30, 2021, animal care revenue increased approximately $600,000 versus the prior year.
As a result of the asset purchase agreement and arrangement we entered into on October 27, 2016, with Invekra, we were obligated to supply Invekra with product at a reduced price through October 27, 2020. We have continued to manufacture for Invekra in small amounts as overflow manufacturing. However, we now charge market prices for manufacturing since the contract ended. The decrease in Latin American revenues for the three and six months ended September 30, 2021, compared to the prior year periods was the result of the Invekra revenue declining to $518,000 and $1,083,000 from $2,024,000 and $4,350,000, respectively.
The increase in Europe and Rest of the World revenues for the three ended September 30, 2021, compared to the prior year was the result of increases in Asia partially offset by decreases in Europe and the Middle East. For the six months ended September 30, 2021, the decrease in Europe and Rest of the World revenues was the result of decreases in Europe and the Middle East partially offset by increases in Asia.
Cost of Revenue and Gross Profit The cost of revenue and gross profit metrics are as follows: Three Months Ended September 30, (In thousands, except for percentages) 2021 2020 Change % Change Cost of Revenue $ 2,503 $ 3,267 $ (764 ) (23% ) Cost of Revenue as a % of Revenue 67% 57% 10% Gross Profit $ 1,241 $ 2,502 $ (1,261 ) (50% ) Gross Profit as a % of Revenue 33% 43% (10% ) Six Months Ended September 30, (In thousands, except for percentages) 2021 2020 Change % Change Cost of Revenue $ 4,734 $ 6,779 $ (2,045 ) (30% ) Cost of Revenue as a % of Revenue 64% 59% 5% Gross Profit $ 2,694 $ 4,757 $ (2,063 ) (43% ) Gross Profit as a % of Revenue 36% 41% (5% )
For the three and six months ended September 30, 2021, gross margins decreased by 10% and 5%, respectively from the same periods in 2020 as a result of the EMC Pharma transaction. We expect our revenue from our prescription dermatology products in the U.S. to decline because the transfer price that EMC Pharma, LLC pays is lower than the prices we received for these products when we sold them ourselves. We further expect to have significantly lower operating costs as the result of not having a direct sales force and the operational costs associated with servicing that revenue, as well as no longer providing rebates.
Research and Development Expense The research and development metrics are as follows: Three Months Ended September 30, (In thousands, except for percentages) 2021 2020 Change % Change Research and Development Expense $ 10 $ (85 ) $ 95 112% Research and Development Expense as a % of Revenue 0.3% (1% ) 1.3%
Six Months Ended September 30, (In thousands, except for percentages) 2021 2020 Change % Change Research and Development Expense $ 95 $ 391 $ (296 ) (76% ) Research and Development Expense as a % of Revenue 1% 3% (2% )
For the three months ended September 30, 2021, research and development expenses of $10,000 increased by $95,000 from a $(85,000) credit balance of research and development expenses in the prior year due to true-up of expenses related to moving the Seattle facility. The decrease in research and development expenses of $296,000 for the six months ended September 2021 versus the prior year was the result of closing the Seattle facility and moving the R&D function to Mexico.
Selling, General and Administrative Expense The selling, general and administrative expense metrics are as follows: Three Months Ended September 30, (In thousands, except for percentages) 2021 2020 Change % Change Selling, General and Administrative Expense $ 2,195 $ 2,418 $ (223 ) (9% ) Selling, General and Administrative Expense as a % of Revenue 59% 42% 17%
Six Months Ended September 30, (In thousands, except for percentages) 2021 2020 Change % Change Selling, General and Administrative Expense $ 4,468 $ 4,862 $ (394 ) (8% ) Selling, General and Administrative Expense as a % of Revenue 60% 42% 18%
The decline in Selling, General and Administrative expense for the three and six months ended September 30, 2021, was $223,000 and $394,000, respectively, and the result the reduction in sales force related to the EMC Pharma transaction.
Interest (expense) income, net
Interest (expense) income, net for the three and six months ended September 30, 2021, was ($4,000) and ($5,000), respectively, compared to $4,000, for the three and six months ended September 30, 2020, respectively.
Other (Expense) Income, net
Other (expense) income for the three and six months ended September 30, 2021, was $723,000 and $531,000 respectively, compared to $(77,000) and $(197,000), respectively, for the three and six months ended September 30, 2020. The increase in other income relates primarily to the recognition of PPP Loan forgiveness in the amount of $723,000.
Gain on Sale of Assets
Gain on the sale of assets was $150,000 for the three and six months ended September 30, 2021, respectively, compared to $55,000 and $132,000, respectively, for the three and six months ended September 30, 2020. During the three months ended September 30, 2020, we sold fixed assets no longer needed after closing our Petaluma manufacturing facility and during the six months ended September 30, 2020, we also sold assets to Infinity along with our Micromed division. In September 2021, we recognized revenue related to the sale of asset to Microsafe previously held in deferred revenue.
Net Income (Loss) from Continuing Operations
Net losses from continuing operations for the three and six months ended September 30, 2021, was $100,000 and $1,198,000, respectively, compared to net income (loss) of $151,000 and $(557,000), respectively, for the three and six months ended September 30, 2020.
Results of Discontinued Operations
Comparison of Three and Six Months Ended September 30, 2021, and 2020
On June 24, 2020, we closed on an asset purchase agreement with Infinity Labs SD, Inc. We decided to divest our Micromed business, resulting in a strategic shift that had a major effect on our operations and financial results. Therefore, the divested Micromed operations meet the criteria to be reported as discontinued operations.
The related assets, liabilities, results of operations and cash flows for our Micromed business are classified as discontinued operations for all periods presented.
The operations of the Micromed business included in discontinued operations is summarized as follows:
Three Months Ended September 30, Six Months Ended September 30, 2021 2020 2021 2020 Revenues $ - $ 2,000 $ - $ 214,000 Cost of revenues - - - 53,000 Selling general and administrative expenses - 33,000 - 39,000 Income (loss) from discontinued operations before tax - (31,000 ) - 122,000 . . .
Nov 15, 2021
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